Following the recession, many banks began focusing their attention on bigger fish looking for larger loans, leaving those owners without knowledge of alternative business financing out in the dark. This shift from main street to Wall Street ended up creating a funding gap that many small-business owners think is insurmountable to them finding a reliable means of funding.
According to a recent survey by Manta, two-thirds of small-business owners believe there is a dearth of funding options, while 69 percent think nothing has been done to improve the funding environment over the past year. Since many of these owners remain unaware of the full spectrum of funding options, more than 70 percent of respondents continued utilizing traditional financing methods such as a bank loan or credit card. A mere 25 percent thought to take advantage of alternative lenders.
Manta Chief Executive Officer John Swanciger lamented the lack of small-business owners using alternative financing options, despite the fact that so many options exist.
“However, we’re seeing a gap between what’s available and the perception among small businesses that the lending environment has not improved,” said Swanciger. “Even though traditional bank loans are difficult to secure, small businesses are still apt to rely on them.”
There are many reasons small-business owners should consider alternative financing. Here are three good reasons for seeking out and obtaining alternative financing:
Only half of the small business loans requested are approved, according to a survey by the Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia. While small banks are obviously a better choice for small businesses, neither of these financial institutions provide ideal numbers for small-business owners in need of working capital. Thankfully they have that option in alternative lenders, who approved roughly 64 percent of the loan requests received.
Small-business owners who do not qualify for a traditional bank loan should consider alternative financing. Of the owners who sought out and used an alternative funding method, 38 percent said they did so because they did not qualify for traditional bank financing.
Many alternative lending firms have less stringent qualifications for small-business owners. Due to these less restrictive stipulations, alternative financing can be a rather attractive option for many small businesses.
Short and quick
Twenty percent of small-business owners who took advantage of the alternative financing did so due to only needing a short-term loan. Since so many big banks are focusing larger loans with greater returns, those owners who need a short-term loan will find much better results with an alternative financier.
Most small-business owners opted to only borrow $100,000 or less, with 40 percent going this route.
In addition to providing a solution for a short-term fix, alternative financing remains a quick and fairly effortless process, especially when compared to the amount of work involved in acquiring a traditional loan. Most banks and credits employ numerous loan committees which can drag out loan applications for weeks and even months. Meanwhile, most alternative lenders provide easy, online access for loan applications that can be as short as a few hours. For quick and easy access to capital, small-business owners should consider alternative lending.
While it is true that many of the alternative lending options charge higher interest rates than traditional banks, this is because of the smaller amounts being loaned out. With smaller loans, higher returns are needed for the lender to remain in business. Alternative financiers cater to mid-prime customers with clear terms and set monthly fees in a reasonable payback period.